Chapter 7 Presentation and Disclosure

MARY EVE F.
ESCOBIDO BSMA I
Chapter 7 - Presentation and Disclosure
1. Explain presentation and disclosure as an effective communication tool.

The presentation and disclosure is an effective communication tool of information in financial
statements as it makes the information more relevant and contributes to a faithful
representation of an entity’s asset, liabilities, income and expenses. It also enhances the
understandability and comparability of information in the financial statements. Through this,
it is supported by not duplicating information in different parts of the financial statements.
2. Explain classification of assets, liabilities and equity.

Assets: tangible and intangible items that the company owns that have value (e.g. cash,
computer systems, patents). Tangible assets are physical entities that the business owns
such as land, buildings, vehicles, equipment, and inventory. While Intangible assets are
things that represent money or value, e.g. Accounts Receivable. Current assets are items
that are completely consumed, sold, or converted into cash in 12 months or less. Examples of
current assets include accounts receivable and prepaid expenses.
Fixed assets are tangible assets with a life span of at least one year and usually longer.
Fixed assets might include machinery, buildings, and vehicles. Fixed assets are typically
not very liquid.
Liabilities: money that the company owes to others (e.g. mortgages, vehicle loans).
Current liabilities are debts that are paid in 12 months or less, and consist mainly of monthly
operating debts. Long-term liabilities are typically mortgages or loans used to purchase or
maintain fixed assets, and are paid off in years instead of months.
Equity: that portion of the total assets that the owners or stockholders of the company fully own;
have paid for outright. There are three types of Equity accounts that will meet the needs of most
small businesses. Contribution (Money Invested): There are times when company owners must invest
their own money into the company. It may be start-up capital or a later infusion of cash. When this occurs,
a Capital or Investment account is credited.
Distribution or Draw (Money Withdrawn): If a business is profitable, the owners often want
some of the profit returned to them. To track this activity, a Draw or Distribution account is
debited.
Accumulation from Prior Years: To tracks a company's Net Income as it accumulates over the
years, Retained Earnings or Owner's Equity is credited.
3. Explain classification of income and expenses.

Income: money the company earns from its sales of products or services, and interest and
dividends earned from marketable securities. Net income is revenue less expenses. Income
is "realized" differently depending on the accounting method used. When a business uses
the Accrual basis accounting method, the revenue is counted as soon as an invoice is
entered into the accounting system.
Expenses: money the company spends to produce the goods or services that it sells (e.g.
office supplies, utilities, advertising. A unique type of Expense account, Depreciation
Expense, is used when purchasing Fixed Assets. Another unique account is Accumulated
Depreciation—a contra-account. Accumulated Depreciation is used to offset the Asset
account for the item.
4. What is aggregation?
This is the adding together of asset, liabilities, equity, income and expenses that have
similar or shared characteristics. Through aggregation, the FS more often gives condensed
or summarized info, the full disclosure are made in the notes in order for the FS to be
concise.
5. Explain capital maintenance.

Capital maintenance approach means that net income occurs only after the capital used
from the beginning of the period is maintained. Thus, the financial performance here can
be determined through: Transaction Approach - traditional way in presenting the Income
Statement; Capital Maintenance Approach there will be net income when the end capital
exceeds the beginning capital.
6. Distinguish return on capital and return of capital.

Return on capital- shareholder’s investment in the entity.
Return of capital- erosion of capital invested.
7. Explain financial capital.

Financial capital refers as the monetary amount of the net assets contributed by
shareholders and the amount of the increase in net assets resulting from earning retained
by the entity.
8. Explain the net income under the financial capital concept.

In financial capital, income is recognized when net assets at the end of the year exceeds
net assets at the beginning of the year. So in other words:
Net assets = capital.
Profit = End, Net Assets - Beg, Net Assets + Distributions during the year - Investments
during the year
9. Explain physical capital.

This is the quantitative measure of the physical productive capacity to produce goods and
services. The amounts used are those in current cost and not historical. It is used if the goal is to
determine operational capability of an entity.
10. Explain the net income under the physical capital concept.
The company only earns a net income if its productive or operating capacity at the end of a period
exceeds the capacity at the beginning of the period, excluding any owners' contributions or
distributions.

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MARY EVE F.

Chapter 7 - Presentation and Disclosure

1. Explain presentation and disclosure as an effective communication tool.

2. Explain classification of assets, liabilities and equity.

3. Explain classification of income and expenses.

5. Explain capital maintenance.

6. Distinguish return on capital and return of capital.

7. Explain financial capital.

8. Explain the net income under the financial capital concept.

9. Explain physical capital.

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